Magazine: Dr. Doom
By STEPHEN MIHM
Two years ago, Nouriel Roubini predicted the current
economic crisis. Now he sees things becoming far worse.

Full Story:
http://www.nytimes.com/2008/08/17/magazine...amp;tntemail1=y

Wag the Dog: How to Conceal Massive Economic Collapse - by Ellen Brown - 2008-08-14 The President's Plunge Protection Team had come to the rescue

A diffent approach than Andrew Bacevich on Bill Moyers, but Dr. Roubani arrives at more or less the same conclusions.

August 17, 2008
Dr. Doom
By STEPHEN MIHM
On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.
The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.

But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities. When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”

Over the past year, whenever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism. In February, when the conventional wisdom held that the venerable investment firms of Wall Street would weather the crisis, Roubini warned that one or more of them would go “belly up” — and six weeks later, Bear Stearns collapsed. Following the Fed’s further extraordinary actions in the spring — including making lines of credit available to selected investment banks and brokerage houses — many economists made note of the ensuing economic rally and proclaimed the credit crisis over and a recession averted. Roubini, who dismissed the rally as nothing more than a “delusional complacency” encouraged by a “bunch of self-serving spinmasters,” stuck to his script of “nightmare” events: waves of corporate bankrupticies, collapses in markets like commercial real estate and municipal bonds and, most alarming, the possible bankruptcy of a large regional or national bank that would trigger a panic by depositors. Not all of these developments have come to pass (and perhaps never will), but the demise last month of the California bank IndyMac — one of the largest such failures in U.S. history — drew only more attention to Roubini’s seeming prescience.

As a result, Roubini, a respected but formerly obscure academic, has become a major figure in the public debate about the economy: the seer who saw it coming. He has been summoned to speak before Congress, the Council on Foreign Relations and the World Economic Forum at Davos. He is now a sought-after adviser, spending much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia. Though he continues to issue colorful doomsday prophecies of a decidedly nonmainstream sort — especially on his popular and polemical blog, where he offers visions of “equity market slaughter” and the “Coming Systemic Bust of the U.S. Banking System” — the mainstream economic establishment appears to be moving closer, however fitfully, to his way of seeing things. “I have in the last few months become more pessimistic than the consensus,” the former Treasury secretary Lawrence Summers told me earlier this year. “Certainly, Nouriel’s writings have been a contributor to that.”

On a cold and dreary day last winter, I met Roubini over lunch in the TriBeCa neighborhood of New York City. “I’m not a pessimist by nature,” he insisted. “I’m not someone who sees things in a bleak way.” Just looking at him, I found the assertion hard to credit. With a dour manner and an aura of gloom about him, Roubini gives the impression of being permanently pained, as if the burden of what he knows is almost too much for him to bear. He rarely smiles, and when he does, his face, topped by an unruly mop of brown hair, contorts into something more closely resembling a grimace.
When I pressed him on his claim that he wasn’t pessimistic, he paused for a moment and then relented a little. “I have more concerns about potential risks and vulnerabilities than most people,” he said, with glum understatement. But these concerns, he argued, make him more of a realist than a pessimist and put him in the role of the cleareyed outsider — unsettling complacency and puncturing pieties.

Roubini, who is 50, has been an outsider his entire life. He was born in Istanbul, the child of Iranian Jews, and his family moved to Tehran when he was 2, then to Tel Aviv and finally to Italy, where he grew up and attended college. He moved to the United States to pursue his doctorate in international economics at Harvard. Along the way he became fluent in Farsi, Hebrew, Italian and English. His accent, an inimitable polyglot growl, radiates a weariness that comes with being what he calls a “global nomad.”

As a graduate student at Harvard, Roubini was an unusual talent, according to his adviser, the Columbia economist Jeffrey Sachs. He was as comfortable in the world of arcane mathematics as he was studying political and economic institutions. “It’s a mix of skills that rarely comes packaged in one person,” Sachs told me. After completing his Ph.D. in 1988, Roubini joined the economics department at Yale, where he first met and began sharing ideas with Robert Shiller, the economist now known for his prescient warnings about the 1990s tech bubble.

The ’90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico’s in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina’s followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.

Roubini’s work was distinguished not only by his conclusions but also by his approach. By making extensive use of transnational comparisons and historical analogies, he was employing a subjective, nontechnical framework, the sort embraced by popular economists like the Times Op-Ed columnist Paul Krugman and Joseph Stiglitz in order to reach a nonacademic audience. Roubini takes pains to note that he remains a rigorous scholarly economist — “When I weigh evidence,” he told me, “I’m drawing on 20 years of accumulated experience using models” — but his approach is not the contemporary scholarly ideal in which an economist builds a model in order to constrain his subjective impressions and abide by a discrete set of data. As Shiller told me, “Nouriel has a different way of seeing things than most economists: he gets into everything.”

Roubini likens his style to that of a policy maker like Alan Greenspan, the former Fed chairman who was said (perhaps apocryphally) to pore over vast quantities of technical economic data while sitting in the bathtub, looking to sniff out where the economy was headed. Roubini also cites, as a more ideologically congenial example, the sweeping, cosmopolitan approach of the legendary economist John Maynard Keynes, whom Roubini, with only slight exaggeration, calls “the most brilliant economist who never wrote down an equation.” The book that Roubini ultimately wrote (with the economist Brad Setser) on the emerging market crises, “Bailouts or Bail-Ins?” contains not a single equation in its 400-plus pages.

After analyzing the markets that collapsed in the ’90s, Roubini set out to determine which country’s economy would be the next to succumb to the same pressures. His surprising answer: the United States’. “The United States,” Roubini remembers thinking, “looked like the biggest emerging market of all.” Of course, the United States wasn’t an emerging market; it was (and still is) the largest economy in the world. But Roubini was unnerved by what he saw in the U.S. economy, in particular its 2004 current-account deficit of $600 billion. He began writing extensively about the dangers of that deficit and then branched out, researching the various effects of the credit boom — including the biggest housing bubble in the nation’s history — that began after the Federal Reserve cut rates to close to zero in 2003. Roubini became convinced that the housing bubble was going to pop.

By late 2004 he had started to write about a “nightmare hard landing scenario for the United States.” He predicted that foreign investors would stop financing the fiscal and current-account deficit and abandon the dollar, wreaking havoc on the economy. He said that these problems, which he called the “twin financial train wrecks,” might manifest themselves in 2005 or, at the latest, 2006. “You have been warned here first,” he wrote ominously on his blog. But by the end of 2006, the train wrecks hadn’t occurred.
Recessions are signal events in any modern economy. And yet remarkably, the profession of economics is quite bad at predicting them. A recent study looked at “consensus forecasts” (the predictions of large groups of economists) that were made in advance of 60 different national recessions that hit around the world in the ’90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance. On those rare occasions when economists did successfully predict recessions, they significantly underestimated the severity of the downturns. Worse, many of the economists failed to anticipate recessions that occurred as soon as two months later.

The dismal science, it seems, is an optimistic profession. Many economists, Roubini among them, argue that some of the optimism is built into the very machinery, the mathematics, of modern economic theory. Econometric models typically rely on the assumption that the near future is likely to be similar to the recent past, and thus it is rare that the models anticipate breaks in the economy. And if the models can’t foresee a relatively minor break like a recession, they have even more trouble modeling and predicting a major rupture like a full-blown financial crisis. Only a handful of 20th-century economists have even bothered to study financial panics. (The most notable example is probably the late economist Hyman Minksy, of whom Roubini is an avid reader.) “These are things most economists barely understand,” Roubini told me. “We’re in uncharted territory where standard economic theory isn’t helpful.”

True though this may be, Roubini’s critics do not agree that his approach is any more accurate. Anirvan Banerji, the economist who challenged Roubini’s first I.M.F. talk, points out that Roubini has been peddling pessimism for years; Banerji contends that Roubini’s apparent foresight is nothing more than an unhappy coincidence of events. “Even a stopped clock is right twice a day,” he told me. “The justification for his bearish call has evolved over the years,” Banerji went on, ticking off the different reasons that Roubini has used to justify his predictions of recessions and crises: rising trade deficits, exploding current-account deficits, Hurricane Katrina, soaring oil prices. All of Roubini’s predictions, Banerji observed, have been based on analogies with past experience. “This forecasting by analogy is a tempting thing to do,” he said. “But you have to pick the right analogy. The danger of this more subjective approach is that instead of letting the objective facts shape your views, you will choose the facts that confirm your existing views.”

Kenneth Rogoff, an economist at Harvard who has known Roubini for decades, told me that he sees great value in Roubini’s willingness to entertain possible situations that are far outside the consensus view of most economists. “If you’re sitting around at the European Central Bank,” he said, “and you’re asking what’s the worst thing that could happen, the first thing people will say is, ‘Let’s see what Nouriel says.’ ” But Rogoff cautioned against equating that skill with forecasting. Roubini, in other words, might be the kind of economist you want to consult about the possibility of the collapse of the municipal-bond market, but he is not necessarily the kind you ask to predict, say, the rise in global demand for paper clips.

His defenders contend that Roubini is not unduly pessimistic. Jeffrey Sachs, his former adviser, told me that “if the underlying conditions call for optimism, Nouriel would be optimistic.” And to be sure, Roubini is capable of being optimistic — or at least of steering clear of absolute worst-case prognostications. He agrees, for example, with the conventional economic wisdom that oil will drop below $100 a barrel in the coming months as global demand weakens. “I’m not comfortable saying that we’re going to end up in the Great Depression,” he told me. “I’m a reasonable person.”

What economic developments does Roubini see on the horizon? And what does he think we should do about them? The first step, he told me in a recent conversation, is to acknowledge the extent of the problem. “We are in a recession, and denying it is nonsense,” he said. When Jim Nussle, the White House budget director, announced last month that the nation had “avoided a recession,” Roubini was incredulous. For months, he has been predicting that the United States will suffer through an 18-month recession that will eventually rank as the “worst since the Great Depression.” Though he is confident that the economy will enter a technical recovery toward the end of next year, he says that job losses, corporate bankruptcies and other drags on growth will continue to take a toll for years.

Roubini has counseled various policy makers, including Federal Reserve governors and senior Treasury Department officials, to mount an aggressive response to the crisis. He applauded when the Federal Reserve cut interest rates to 2 percent from 5.25 percent beginning last summer. He also supported the Fed’s willingness to engineer a takeover of Bear Stearns. Roubini argues that the Fed’s actions averted catastrophe, though he says he believes that future bailouts should focus on mortgage owners, not investors. Accordingly, he sees the choice facing the United States as stark but simple: either the government backs up a trillion-plus dollars’ worth of high-risk mortgages (in exchange for the lenders’ agreement to reduce monthly mortgage payments), or the banks and other institutions holding those mortgages — or the complex securities derived from them — go under. “You either nationalize the banks or you nationalize the mortgages,” he said. “Otherwise, they’re all toast.”

For months Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion — the amount allowed for by the housing legislation sponsored by Representative Barney Frank and Senator Christopher Dodd — but something between a trillion and a trillion and a half dollars. But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”

Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of the Federal Deposit Insurance Corporation. “A good third of the regional banks won’t make it,” he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. “Our biggest financiers are China, Russia and the gulf states,” Roubini noted. “These are rivals, not allies.”
The United States, Roubini went on, will likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. “Once you run current-account deficits, you depend on the kindness of strangers,” he said, pausing to let out a resigned sigh. “This might be the beginning of the end of the American empire.”

The Endgame Nears For Fannie and Freddie
Barron's - USA
The impact of a failed GSE debt auction would be global and catastrophic, since foreigners, including many Asian central banks, owned $1.5 trillion in ...
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Credit crunch may take out large US bank warns former IMF chief
Gary Duncan, Economics Editor and Leo Lewis, Asia Business Correspondent
The deepening toll from the global financial crisis could trigger the failure of a large US bank within months, a respected former chief economist of the International Monetary Fund claimed today, fuelling another battering for banking shares.

Professor Kenneth Rogoff, a leading academic economist, said there was yet worse news to come from the worldwide credit crunch and financial turmoil, particularly in the United States, and that a high-profile casualty among American banks was highly likely.

"The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come," Prof Rogoff said at a conference in Singapore.

In an ominous warning, he added: "We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one — one of the big investment banks or big banks," he said.

• Tempus analysis: Timely reminder

• Crunch calendar: where it all went wrong

• Credit crunch: One year on

Rising anxieties over "worse to come" in the credit crisis sent shares tumbling in Europe and Asia.

In London, the FTSE 100 index extended opening losses as widespread fears over the financial sector's woes led to another battering for bank stocks. The FTSE fell 105.40 points, or 1.93 per cent at 5,344.80, Germany's Dax shed 1.87 per cent, while the CAC 40 in Paris lost 1.98 per cent.

Professor Rogoff, who was chief economist at the IMF from 2001 to 2004, predicted that the crisis would foster a new wave of consolidation in the US financial sector before it was over, with mergers between large institutions.

He also suggested that Fannie Mae and Freddie Mac, the struggling US secondary mortgage lending giants, were likely to cease to exist in their present form within a few years.

His prediction over the fate of Fannie and Freddie came after investors dumped the two groups' shares on Monday after reports suggested that the US Treasury may have no choice but to effectively nationalise them.

The professor also sounded a warning over rising US inflation, which rose last month to its highest since 1991, and criticised the Federal Reserve for having cut American interest rates too drastically. "Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States," he said.

As investors' edginess over the threat of further financial turbulence sent equity markets into a further spin, bank shares were hit hardest. Among the biggest fallers in London morning trade were HBOS, down almost 6 per cent, Royal Bank of Scotland, whose shares plunged by 4 per cent, while HSBC fell 1.5 per cent. In continental Europe, Spain's Banco Santander was off 2.5 per cent, and BNP Paribas lost 3.6 per cent.

Persistent worries over the rapidly deteriorating economic outlook in the UK also saw sterling succumb to fresh losses. The pound lost almost a cent against the dollar, dropping back to $1.8565, not far above near-two year lows plumbed on Friday.

Earlier, there were fresh jitters in Asia, with the region's leading bourses in sharp retreat after a dire overnight performance by Wall Street left the Dow Jones Industrial Average down by more than 180 points. Both Asian markets and Wall Street were unnerved by suggestions over the prospects for Fannie Mae and Freddie Mac.

While Japanese banks have remained relatively under-exposed to sub-prime mortgage products, many fear that they would be heavily exposed to a nationalisation of Fannie and Freddie. The large Japanese financial houses hold around Y9.6 trillion (£47 billion) in bonds and mortgage-backed paper issued by housing finance groups in the US.

"If the recapitalisation talk is realised, there are no assurances that the securities that have been issued [by U.S. mortgage firms] will be 100 per cent guaranteed," said Yutaka Shiraki, a senior equity strategist at Mitsubishi UFJ Securities.

Financial sector shares were particularly badly hit in Tokyo, where they led the Nikkei 225 Index into a 300-point decline. The selling continued throughout the day, and peaked after a declaration by the Bank of Japan that the world's second largest economy was now looking "sluggish".

Although the central bank's downbeat economic report included vague predictions of a return to growth over time, traders said that the comments had shattered any last hope that Asia's export-led economy might somehow "decouple" from the woes in the US.

The picture was somewhat more stable in Shanghai, which spent a day in relative limbo following Monday's 5.3 per cent nosedive. With Chinese stocks beating a daily retreat, investors are focused on the 2001 index high of 2,245-points. Some believe that level will hold up as a technical floor on the selling, others believe that it may shortly fail and unleash a much deeper collapse in stock values.


http://business.timesonline.co.uk/tol/busi...icle4563171.ece

Wishful thinking.

I heard another "expert" say we were in the bottom of the second inning.

So far, about $500 billion in bad debts written off.

Estimated bad debt yet to go - - another $1500 billion.

Which could take three more years.

Maybe more

<h1 class="rgemamblog"> The worst economic and financial crisis in decades</h1>
Nouriel Roubini | Aug 20, 2008
Regular readers of this blog are familiar with my views. But here below is a detailed summary of the reasons for my views – as presented in this blog in the last few months - that this will turn out to be the worst financial crisis since the Great Depression and the worst US recession in decades (hyperlinks to my relevant recent writings are provided for each argument):

• This is by far the worst financial crisis since the Great Depression, not as severe as the Great Depression but second only to it.
• At the end of the day this financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion. The financial and banking crisis will be severe and last several years leading to a severe and persistent liquidity and credit crunch.
• This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages including hundreds of billions of dollars of home equity loans that are worth little; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk – and the collapse of many counterparties – will lead to a systemic collapse of this market.
• Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust.
• Dozens of large regional/national banks (a’ la IndyMac) are also effectively insolvent given their extreme exposure to real estate and will also eventually go bust. Most of these regional banks – starting with Wachovia and Washington Mutual – look like walking zombies in the same way IndyMac was.
• Even some major money center banks are also semi-insolvent and while they are deemed too big to fail their rescue with FDIC money will be extremely costly. In 1990-91 at the height of that recession and banking crisis many major banks – in addition to 1000 plus S&L's that went bust – were effectively insolvent, including, as it was well known at that time, Citibank. At that time the Fed and regulators used instruments similar to those used today – easy money and steepening of the intermediation yield curve, aggressive forbearance, creative – i.e. liar – accounting, etc. – to rescue these major financial institutions from formal bankruptcy. But at that time the housing bust and the ensuing decline in home prices was much smaller than today: during that recession home prices – as measured by the Case-Shiller/S&P index – fell less than 5% from their peak. This time around instead such an index has already fallen 18% from its peak and it will most likely fall by a cumulative 30% before it bottoms sometime in 2010. If a 5% fall in home prices was enough to make Citi effectively insolvent in 1991 what will a 30% fall in home prices – and massive defaults on many other forms of credit (commercial real estate loans, credit cards, auto loans, student loans, home equity loans, leveraged loans, muni bonds, industrial and commercial loans, corporate bonds, CDS) - do to these financial institutions? It challenges the credulity of even spin masters to argue that financial firms are not in worse shape today than they were in 1990-91 when a significant number of major banks were technically insolvent. So, not only hundreds of small banks and a significant fraction of regional banks but also some major money center banks will become effectively insolvent during this crisis.
• In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks). Firms that borrow liquid and short, highly leverage themselves and lend in longer term and illiquid ways (i.e. most of the shadow banking system) cannot survive without formal deposit insurance and formal permanent lender of last resort support from the central bank.
• The FDIC will for sure run out of money as hundreds of banks will go bust and their depositors will have to be made whole given deposit insurance. With funds of only $53 billion, already up to 15% of such funds will be used to rescue the depositors of IndyMac alone. Thus, the FDIC is already requesting to Congress that the deposit insurance premia should be raised to compensate for this shortfall of funding. Too bad that this increase in insurance premia – that should be high enough in advance (not ex-post) to ensure that deposit insurance is incentive-compatible and not leading to gambling for redemption via risky lending in banks – is now too little and too late and is requested when the damage is already done as the biggest credit bubble in U.S. history is now going bust. Also the FDIC has done a mediocre job at identifying which banks are at risk. So far there are only about 90 banks on its watch list; and IndyMac was not put on that list until last month! So if the FDIC did not even identify IndyMac as in trouble until it was too late, how many other IndyMacs are out there that that the FDIC has not identified yet? Certainly a few hundred but such honest analysis of banks at risk is nowhere to be found.
• Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.
• Massive amount of creative accounting and other forms of balance sheet window dressing is occurring to prevent banks from recognizing their true losses. First, most financial institutions are putting increasing numbers of assets in the illiquid buckets of Level 2 and Level 3 assets. While FASB 157 should prevent manipulation of the valuation of such illiquid assets, forbearance by the SEC, the Fed and other regulators allows a massive amount of fudging. An insider told me that in a major financial institution the approach is as follows now: top management decide in advance what the announced writedowns should be and folks dealing with the toxic/illiquid assets come up with totally ad hoc assumptions to make sure that such illiquid assets are valued consistently with the decided-in-advance amount of writedowns and losses. This is not earnings smoothing; this is active manipulation and falsification of financial results aimed at creating even more obfuscation of the true state of financial institutions. This obfuscation is actively abetted by the SEC, the Fed and all other regulators that are now in forbearance crisis management stage where the objective is to avoid at any cost anything that may trigger a financial meltdown. Thus, most of these earnings reports are not worth the paper they are written off.
• Additional earnings manipulation occurs in a variety of ways. First, ad hoc assumptions still used to value and write down level 2 and level 3 assets. Second, banks are leaving aside less reserves for loan losses that are much less than necessary; they do that by using ad hoc assumptions about future losses on mortgages, credit cards, auto loans, student loans, home equity loans and other commercial real estate loans and industrial and commercial loans. Reserves for loan losses have been sharply lagging actual and expected losses, thus padding earnings as decided by the financial institutions' managers. Third, there is disposal of illiquid and toxic assets in ways that misleadingly reduces the amount of actual writedowns. An example is as follows: suppose a bank wants to dump illiquid MBS or leveraged loans that are worth – mark to market – 70 cents on the dollar rather than 100 cents on the dollar. Then, instead of selling these at a price of 70 and showing a 30% writedown these are sold to hedge funds and other investors to a price closer to par – and thus showing in the balance sheet a smaller writedown – by providing a subsidy to the buyer of the security: so a hedge fund will buy such toxic securities at 80 or 90 cents and receive a loan to finance the transaction at an interest well below the borrowing costs for the funds. Thus, writedowns are then shown smaller than the true underlying loss on the asset and the bank finances that fudged transaction with earning less revenues than otherwise on its credit portfolio. This is an accounting scam that auditors and regulators are abetting on a regular basis. An example of such a scam is the recent Merrill Lynch transaction with Lone Start to “sell” its exposure to CDOs.
• The bailout plan of Fannie and Freddie implies a direct bailout of financial institutions and helps them to report better than expected earnings in two ways. First, since these financial institutions hold massive amounts of agency debt the government bailout of the holders of such unsecured debt props the market price of the agency debt (reduces its spread relative to Treasuries) and thus allows financial institutions and investors to report less mark to market losses on the values of such assets. Second, after the bust of subprime, near prime and prime mortgage markets the market for private label MBS is dead with absolutely no origination of new MBS. Thus, today – as senior mortgage market participant put it – Fannie and Freddie are “THE mortgage market” as the only institutions that securitize and guarantee mortgages are Fannie and Freddie. Without the government bailout plan that last channel for mortgage securitization and insurance would be frozen and the ability of banks to originate even prime and conforming mortgages would be serious hampered and its cost sharply increased. Thus, the Fannie and Freddie bailout is actually a bailout of the mortgage market and of every institution that holds agency debt or the MBS issued by the two GSES and of every institution that is in the mortgage origination business. On top of this Fannie and Freddie have also been used as tools of public policy in order to further grease the mortgage market and the banks originating mortgages: their portfolio limits were increased; their capital requirement reduced; and the limit for what a conforming loans – the only ones that Fannie and Freddie can securitize – increased from about $420K to over $720K.
• The Fed has been actively beefing up the earnings and balance sheet of financial institutions in four major ways. First, a 325bps reduction in the Fed Funds rate sharply reduced the cost of borrowing for banks and allowed them to enjoy a nice intermediation margin (the difference between longer terms interest rates at which they lend and the much lower short term interest rates at which they borrow). This steepening of the yield curve is a major subsidy to financial institutions. Second, the Fed has created a range of new liquidity facilities – the TAF, the TSLF, the PDCF – that allow banks and now non-bank primary dealers to swap their illiquid toxic asset backed securities for liquid Treasuries and that provide access for non-banks – and now also Fannie and Freddie - to the Fed’s discount window liquidity. Third, the bailout of Bear Stearns creditors – JP Morgan and many other counterparties of Bear – not only avoided a systemic meltdown and a certain run on the other broker dealers but it has led the Fed to take on a significant credit risk by taking off the balance sheet of Bear Stearns over $29 billion of toxic securities. So the Fed has directly and indirectly systemically subsidized and propped up the financial system and the earnings of bank and non-bank financial institutions. Fourth, a variety of forbearance regulatory actions – starting with the waiver of Regulation W for some major banks – have been used to beef up the profits and earnings of financial institutions and reduce their reported writedowns.
• The entire Federal Home Loan Bank system – another GSE system that is another effective arm of the government - has been used to prop hundreds of mortgage lenders. The insolvent Countrywide alone received more than $51 billion of funds from this semi-public system. This is a system that has increased its lending in the last 18 months by hundreds of billions of dollars: Citigroup, Bank of America and most other US mortgage lenders have also been beneficiaries of this public subsidy to the tune of dozens of billions of dollars each.
• The ability of US financial institutions to recapitalize themselves is constrained by financial protectionism: the only large players that have funds to put at work are sovereign wealth funds, especially from countries that are strategic rivals – not allies – of the US or from unstable petro-states. Thus, the backlash against such SWF will seriously limit the ability of banks and other financial institutions to recapitalize themselves.
• This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (August). This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices.
• This will be a long, ugly and nasty U-shaped recession lasting at least 12 months and more likely 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects. While an L-shaped decade long economic stagnation is unlikely the recovery of the economy from this recession will be weak as the financial crisis and serious macro imbalances will lead to sub-par (below trend) economic growth for years to come.
• The US recession has already started in Q1 of 2008 based on the five indicators tracked by the NBER. The Q2 rebound is only driven by the temporary tax rebates and GDP growth will slip into negative territory from Q3 2008 until at least Q2 of 2009.
• Equity prices in the US and abroad will go much deeper in bear territory. In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis. gThus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of US and global stock markets.
• The rest of the world will not decouple from the US recession and from the US financial meltdown; it will re-couple big time. Already 12 major economies are on the way to a recessionary hard landing. Indeed all of the G7 economies are now entering a recession. While the rest of the world will experience a severe growth slowdown only one step removed from a global recession. Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.
• The current U.S recession and sharp global economic slowdown is combining the worst of the oil shocks of the 1970s with the worst of the asset/credit bust shocks (and ensuing credit crunch and investment busts) of 1990-91 and 2001: like in 1973 and 1979 we are facing a stagflationary shock to oil, energy and other commodity prices that by itself may tip many oil importing countries into a sharp slowdown or an outright recession. Also, like 1990-91 and 2001 we are now facing another asset bubble and credit bubble gone bust big time: the housing and overall household credit boom of the last seven years has now gone bust in the same way as the 1980s housing bubble and 1990s tech bubble went bust in 1990 and in 2000 triggering recessions. And a similar housing/asset/credit bubble is going bust in other countries – U.K., Spain, Ireland, Italy, Portugal, etc. – leading to a risk of a hard landing in these economies.
• But over time inflation will be the last problem that the Fed will have to face as a severe US recession and global slowdown will lead to a sharp reduction in inflationary pressures in the U.S.: slack in goods markets with demand falling below supply will reduce pricing power of firms; slack in labor markets with unemployment rising will reduce wage pressures and labor costs pressures; a fall in commodity prices of the order of 30% will further reduce inflationary pressure.
• The Fed will have to cut the Fed Funds rate much more as severe downside risks to growth and to financial stability will dominate any short-term upward inflationary pressures. Leaving aside the risk of a collapse of the US dollar given this easier monetary policy the Fed Funds rate may end up being closer to 0% than 1% by the end of this financial crisis and severe recession cycle.
• The Bretton Woods 2 regime of fixed exchange rates to the US dollar and/or heavily managed exchange will unravel – as the first Bretton Woods regimes did in the early 1970s – as US twin deficits, recession, financial crisis and rising commodity and goods inflation in emerging market economies will destroy the basis for its existence.
• Thus, the scenario of 12 steps to a financial disaster that I outlined in my February 2008 paper is unfolding as predicted. If anything financial conditions are now much worse than they were at the previous peak of this financial crisis, i.e. in mid-march of 2008.
• This financial crisis signals the beginning of the decline of the American Empire; over time the relative economic, financial, military, geostrategic power of the US and reserve role of the US dollar will significantly decline.
• This crisis also represents a Crisis of the Suburbian (“McMansions and Gas-Guzzling SUVs”) American Way of Life. The sharp rise in gasoline and energy prices and transportation costs, together with the sharp fall in home prices, will radically change the pattern of living of the typical American household.
• Some of my views are fleshed out in more detail in my recent interview on Barron’s and in the profile article about me recently published by the New York Times magazine.

http://www.rgemonitor.com/roubini-monitor/253378/the_worst_economic_and_financial_crisis_in_decades

Economic Critical Juncture Towards a Generational Depression
The Market Oracle - London,UK
US banks, credit, stocks and consumption did peak out TOGETHER in 2007 while the common peak is opening the door to a GENERATIONAL recession/depression ...
See all stories on this topic

Economic downturn takes a toll on city and state pension systems
Examiner.com - USA
SAN FRANCISCO, CA --- One year into the most serious real estate crash since the Great Depression and the big pensions including San Francisco's have ...

Is it really just ‘the economy, stupid’?
MSNBC - USA
... recession or a depression, with about one-fifth opting for the depression view. Yet preliminary economic data from the second quarter of this year shows ...

Media Ignore Obama's 'Economic Disaster' Declaration
Business Media Institute - Alexandria,VA,USA
The media compared current economic conditions to the Great Depression more than 40 times in the first four months of 2008. Coverage of the Bear Stearns ...

Debating the Fed’s ability to fix the financial crisis
Kansas City Star - MO,USA
The International Monetary Fund has described the current US financial shock as the biggest “since the Great Depression.” But Bernanke — a scholar of the ...

Where Is Congress?
The Problem with Problem Banks

In late July, I wrote to U.S. Senate Committee on Banking, Housing and Urban Affairs Chairman Christopher Dodd (D-Conn.) and House Financial Services Committee Chairman Barney Frank, D-Mass. to suggest that they jointly hold hearings on the FDIC's ability to deal with potential bank failures in the next several years. In the letter, I noted that in a March 10, 2008 memorandum on insurance assessment rates, Arthur J. Murton, Director of the Division of Insurance and Research for the FDIC stated:

While 99 percent of insured institutions meet the "well capitalized" criteria, the possibility remains that the fund could suffer insurance losses that are significantly higher than anticipated. The U.S. economy and the banking sector currently face a significant amount of uncertainty from ongoing housing sector problems, financial market turbulence and potentially weak prospects for consumer spending. These problems could lead to significantly higher loan losses and weaker earnings for insured institutions.

FDIC Chairman Sheila C. Bair, however, has been singing a more upbeat tune. She recently said, "The banking system in this country remains on a solid footing through the guarantees provided by FDIC insurance. The overwhelming majority of banks in this country are safe and sound and the chances that your own bank could fail are remote. However, if that does happen, the FDIC will be there - as always - to protect your insured deposits."

Despite these reassuring words, the recent failure of IndyMac highlights the need for tough Congressional oversight. Banking experts have indicated that the cost of the collapse of IndyMac alone will be between $4 billion and $8 billion. The FDIC has approximately $53 billion on hand to deal with bank failures. This amount may not be adequate, given the cost of IndyMac and given the approximately $4 trillion in deposits the FDIC insures.

Congressional oversight of the financial services industry and its regulators should be a topic priority for Congress. I even suggested several questions that should be put to FDIC officials such as:

1. Was IndyMac on the list of "Problem Institutions" before it failed?

2. Were the other banks that failed this year on the FDIC list of "Problem Institutions"?

3. What is the anticipated cost of dealing with the failures of the other four banks that failed this year?

4. As of March 31, 2008 the FDIC reported 90 "Problem Institutions" with assets of $26 billion. What is the current number of "Problem Institutions" and what are the assets of these "Problem Institutions"?

5. How many banks are likely to fail in 2008 and 2009 respectively?

6. What is the estimated range of costs of dealing with the projected failures?

7. What will the effect of higher losses than those projected be on the FDIC's estimate of the proper reserve ratio?

8. What are the FDIC's projections for reserves needed and potential bank failures beyond 2009?

9. Is the FDIC resisting raising the current rates of assessments on FDIC insured banks so that the cost of any significant bailouts will have to be shifted to the taxpayers?

10. Does the Government Accountability Office (GAO) believe that the existing rate schedule for banks to pay into the Deposit Insurance Fund (DIF) is set at the proper level?

It would also make sense for Congress to revisit the FDIC's current approach to setting reserve ratios for banks.

The FDIC is not likely to address its own inability to clearly assess the current risks posed to depositors and taxpayers by the high-rolling, bailout-prone banking industry.

When Congress reconvenes after Labor Day it would be prudent for Senator Dodd and Congressman Frank to focus on the FDIC and our nation's troubled banks through some tough no-holds-barred hearings. These two lawmakers are going to have to hear from the people back home soon.

Neither Senator Dodd nor Congressman Frank have responded to my letter of July 23, 2008.

Ralph Nader is running for president as an independent.

VIKRAM AMAR The Federal Deposit Insurance Corporation: With Banks Failing or In Peril, It's Especially Important Now to Understand and Reform this Crucial Institution Many Americans have a simple understanding about FDIC deposit insurance: You can only deposit $100,000 at a particular bank and count on its being insured. However, as FindLaw columnist and U.C., Davis, law professor Vikram Amar explains, that understanding -- which is causing many Americans to do business at multiple banks to make sure all the money they have saved is insured --- is inaccurate in important respects. Through trust accounts and joint accounts, Amar notes, Americans can insure much more than $100,000 at a single bank; he thus encourages readers to consult and understand the FDIC's complex rules on the subject before deciding where to deposit their savings. Amar also suggests avenues for reforming the FDIC's practices so they can better serve their intended purpose of giving Americans security and the economy stability.

Bank collapse ahead: The worst of the global financial crisis is yet to come - by Jan Dahinten - 2008-08-20

Stagflation is Here, and It is a Weapon of Mass Destruction - by Richard C. Cook - 2008-08-20

Will Paulson Use His Blank Check? Will F&F Be Privatized Or (Partially) Nationalized?

• Richmond Federal Reserve Bank President Jeffrey Lacker and Arthur Levitt Say F&F should be privatized now. Fed's Stern is examining banking sector's exposure to F&F preferred equity.
• Kopecki: $223 billion of agency bonds are due by the end of the quarter--> rollover conditions may determine whether there will be a federal bail-out.

Click Here For Full Analysis

Lessons from a "lost decade"
Aug 21st 2008
From The Economist print edition

Will America follow Japan into a decade of stagnation?
AS FALLING house prices and tightening credit squeeze America's economy, some worry that the country may suffer a decade of stagnation, as Japan did after its bubble burst in the early 1990s. Japan's property bubble was also fuelled by cheap money and financial liberalisation and—just as in America—most people assumed that property prices could not fall nationally. When they did, borrowers defaulted and banks cut their lending. The result was a decade with average growth of less than 1%.





Most dismiss the idea that America could suffer the same fate as Japan, but some of the differences are overstated. For example, some claim that Japan's bubble was much bigger than America's. Yet average house prices nationwide rose by 90% in America between 2000 and 2006, compared with a gain of 51% in Japan between 1985 and early 1991, when Japanese home prices peaked (see left-hand chart). Prices in Japan's biggest cities rose faster, but nationwide figures matter more when gauging the impact on the economy. Japanese home prices have since fallen by just over 40%. American prices are already down by 20%, and many economists reckon they could fall by another 10% or more.

What about commercial property? Again, average prices rose by less in Japan (80%) than in America (90%) over those same periods. Thus Japan's property boom was, if anything, smaller than America's. Japan also had a stockmarket bubble, which burst a year earlier than that in property. This hurt banks, because they counted part of their equity holdings in other firms as capital. But its impact on households was modest, because only 30% of the population held shares, compared with over half of Americans.

Nor were Japanese policymakers any slower than American ones to cut interest rates and loosen fiscal policy after the bubble burst, contrary to popular misconceptions. The Bank of Japan (BoJ) began to lower interest rates in July 1991, soon after property prices began to decline. The discount rate was cut from 6% to 1.75% by the end of 1993. Two years after American house prices started to slide, the Fed funds rate has fallen from 5.25% to 2% (see right-hand chart). A study by America's Federal Reserve concluded that Japanese interest rates fell more sharply in the early 1990s than required by the "Taylor rule", which establishes the appropriate rate using the amount of spare capacity and inflation.

Japan also gave its economy a big fiscal boost. The cyclically adjusted budget deficit (which excludes the automatic impact of slower growth on tax revenues) increased by an annual average of 1.8% of GDP in 1992 and 1993—similar to America's budget boost this year. Japan's monetary and fiscal stimulus did help to lift the economy. After a recession in 1993-94, GDP was growing at an annual rate of around 2.5% by 1995. But deflation also emerged that year, pushing up real interest rates and increasing the real burden of debt. It was from here on that Japan made its biggest policy mistakes. In 1997 the government raised its consumption tax to try to slim its budget deficit. And with interest rates close to zero, the BoJ insisted that there was nothing more it could do. Only much later did it start to print lots of money.

America's inflation rate of above 5% is an advantage. Not only are real interest rates negative, but inflation is also helping to bring the housing market back to fair value with a smaller fall in prices than otherwise. But in another way America is more exposed than Japan was. When its bubble burst in 1991, Japan's households saved 15% of their income. By 2001 saving had fallen to 5%, which helped to prop up consumer spending. America's saving rate of close to zero leaves no such cushion.


The perils of procrastination John Makin, at the American Enterprise Institute, a think-tank, argues that monetary and fiscal relief were necessary but not sufficient to revive Japan's economy. The missing ingredient was a clean-up of the banking system, on which Japanese firms were more dependent than their American counterparts. Japanese banks hid their bad loans beneath opaque corporate structures, and curtailed new lending to profitable businesses. A vicious circle developed, whereby banks' bad loans depressed growth which then created more bad loans.

In another new report Richard Jerram, at Macquarie Securities, concludes that America "will not come close to repeating the experience of Japan", because its regulatory system, financial markets and political structure will not let it procrastinate for so long. America has a more transparent regulatory structure which presses banks into recognising losses and repairing their balance-sheets—even if regulators were slow to recognise that the banks were shifting risky securitised assets off their balance-sheets in the first place. But Japan's regulators for a long while were in cahoots with banks over hiding their bad loans.

Over the past year, American banks have been quicker than those in Japan in the 1990s to disclose and write off losses and raise new capital. In Japan it took a long while before the political will was there to use taxpayers' money to plug the banking system. A big test for America's Treasury will be how quickly it recognises the need to nationalise Fannie Mae and Freddie Mac, the teetering mortgage giants.

One advantage over Japan, says Mr Jerram, is that America is spreading the costs of its housing bust across other countries. Foreigners hold a large slice of American mortgage-backed securities. Sovereign-wealth funds have provided new capital for American banks. And America's booming exports have helped to support its economy, thanks to the cheap dollar. In contrast, the yen's sharp appreciation after Japan's bubble burst hurt exports at the same time as domestic demand was being squeezed.

By learning from Japan's mistakes, America can avoid a dismal decade. However, it would be arrogant for those in Washington, DC, to assume that Japan's troubles simply reflected its macroeconomic incompetence. Experience in other countries shows that serious asset-price busts often lead to economic downturns lasting several years. Only a wild optimist would believe that the worst is over in America.

USA rewrites M&A textbook with weak dollar
guardian.co.uk - UK
The world's biggest economy is suffering from its deepest housing slump since the Great Depression and its stock market lost nearly 24 percent since ...

Recession: boom years are over as economy slows to halt
http://business.timesonline.co.uk/tol/busi...icle4592947.ece

US 'recession' to go on for months
The Press Association -
Billionaire investor Warren Buffett said the US economy was still "in recession" and would continue to be for at least several more months. ...

Economic woes will continue, Buffett says
Kansas City Star, MO -
By JOSH FUNK AP OMAHA, Neb. | Billionaire investor Warren Buffett said Friday the economy continued to be in a recession, by his definition, ...

Buffett says US economy's troubles will continue
International Herald Tribune, France -
AP OMAHA, Nebraska: Billionaire investor Warren Buffett said Friday the US economy continues to be in a recession, by his definition, and will continue to ...

Bloomberg: Here's to Hoping Nouriel Roubini Is Proven Wrong by William Pesek Delicious Digg Facebook reddit Technorati Nouriel Roubini | Aug 22, 2008 Here is the latest article ("Here is Hoping Nouriel Roubini is Proven Wrong") by Bloomberg columinist William Pesek. The subtext of the piece is that while I may be proven wrong it is more likely I will be right:

"It's hard to forget your first Nouriel Roubini experience.

Fifteen months ago, I watched an Asian Development Bank audience in Kyoto squirm and fidget as the chairman of Roubini Global Economics LLC gave his bleak, contrarian opinion that the global financial system was about to hit a wall.

``After listening to you, I feel like a need a drink or a hug or something,'' I joked to him afterward. Roubini gets a lot of such quips, and as his direst predictions about a once-in-a- lifetime bust in the U.S. economy come ever closer to reality I find myself hoping he'll be proven wrong.

Hats off to Roubini. How many times in the past year did we hear people say ``this credit crisis is containable'' or ``the worst is over'' or ``subprime-loan problems won't spread to other asset classes,'' and the like?

Roubini didn't waver, and he took considerable flack for it.

That said, Asia had better hope Roubini's economic fears are proven wrong. Ditto for the gloomy predictions of Oppenheimer & Co. analyst Meredith Whitney, who recently was toasted on the cover of Fortune magazine.

Perhaps the magazine-cover curse will kick in and the attention being tossed at Roubini, profiled last week by the New York Times, and Whitney means the worst really is over. Of course, they might say it's just a matter of public perception catching up with the reality -- a financial system in tatters.

Subprime System

One reason to think Roubini won't be proven wrong is his argument that the problem isn't the subprime mortgage market -- it's a subprime U.S. financial system. Fixing the problems sending financial contagion around the globe will require tough decisions in Washington and reforms in Wall Street's securitization system. And that's hardly happening.

How far Wall Street's reputation has fallen since the collapse of Bear Stearns Cos. was revealed by the Aiful Corp. saga. Japan's biggest consumer lender by assets threatened to sue Lehman Brothers Holdings Inc. in June after analyst Walter Altherr called Aiful ``arguably insolvent'' in a report.

Lehman retracted the report earlier this month, yet not before Japan's investment community had a good chuckle. The fourth-largest U.S. securities firm, with a share price down 79 percent this year, calling another institution shaky? Talk about the proverbial pot calling the kettle black.

`Muddle Along'

Even the best-case scenario for Asia looks gloomy. As analysts like Mark Matthews of Merrill Lynch & Co. in Hong Kong point out, the next few years will see Asia-Pacific markets excluding Japan ``muddle along.'' Wasn't it just a year ago that investors were claiming Asia had decoupled from the U.S. economy?

The reasons Asia should hope Roubini eats some crow are many.

For one, the region remains too reliant on exports. While Asia made some progress boosting domestic demand, slowing U.S. growth will chip away at living standards from Seoul to Jakarta. For another, emerging markets may slide further if global investors become even more risk adverse.

Mark Mobius, executive chairman of Templeton Asset Management, may indeed be right to call the decline in emerging- market stocks ``overdone.'' Still, a deep recession in the world's biggest economy could accelerate those losses.

Asia central banks amassed trillions of dollars of currency reserves in recent years, a move that won't seem illogical if Roubini is proved correct. That cash will be needed to provide insurance to global investors that the region won't see a repeat of its 1997 crisis.

U.S. Contagion

A decade ago, Asia was exporting financial contagion potent enough to send the Dow Jones Industrial Average down hundreds of points here and there. These days, the U.S. is returning the favor, just as Diwa Guinigundo, deputy governor of the Philippine central bank, predicted to me a year ago. Hats off to Guinigundo; he was absolutely right.

Where do we stand now? ``One year later, in the U.S. the lack of improvement in the money markets is still taking center stage,'' Roubini said yesterday. And the Federal Reserve, on top of cutting its benchmark interest rate 325 basis points, continues to expand its liquidity facilities ``without significant impact on credit creation.''

That's affecting emerging markets. For example, Roubini said, ``the global credit crisis has exacerbated home-grown liquidity squeezes in countries like South Korea.''

The question is how Asia would weather further weakness in the U.S. China's boom has provided some cushion, yet officials in Beijing are busily working to tame inflation. It also would be a mistake to think a U.S. recession won't slam China.

So here's to Roubini for having a good couple of years of economic prognosticating. And here's to hoping he'll be less right in the future. Asia's prosperity may depend on it."

Pesek is right that it would be much better for Asia if I am proven wrong rather than right. But now with all of the G7 economies on the way to a painful recession the hope that Asia can decouple from this recession are rapidly fading. You can also read: Asia is Learning the Wrong Lessons from Its 1997-98 Financial Crisis: The Rising Risks of a New and Different Type of Financial Crisis in Asia (by Nouriel Roubini, May 2007) where I presented some of the views expressed at that ADB meeting about the financial risks faced by China and Asia.


http://www.rgemonitor.com/blog/roubini

• The worst economic and financial crisis in decades, by Nouriel Roubini
  2008-08-20 05:13:10
• New York Times Article on Nouriel Roubini as "Dr. Doom", by Nouriel Roubini
  2008-08-15 18:15:50

<h4 class="subhead">More BusinessHope For Wall Street... Lehman Survives... "America's Cheapest Family"</h4> Quick Read

Business / Your Money: Finding the Mess Behind the Mess
By TYLER COWEN
The fundamental problem in the American economy is that,
for years, people treated rising asset prices as a
substitute for personal savings.

Full Story:
http://www.nytimes.com/2008/08/24/business...amp;tntemail1=y

That Student Loan, So Hard to Shake

• NY Times
• 08/23/2008 05:16 PM

What Will Mac ’n’ Mae Cost You and Me?

• NY Times
• Morgenson
• 08/23/2008 05:15 PM

U.S. and Global Economies Slipping in Unison

• NY Times
• 08/23/2008 05:14 PM

Ex-BOE official says Fed rate cuts went too far

• Reuters
• 08/23/2008 05:09 PM

In the Ruins of the Housing Bust

• NY Times
• 08/23/2008 05:08 PM

Columbian Bank and Trust of Kansas Shut by Regulators

• Bloomberg
• 08/23/2008 07:39 AM

Treasury wants GSEs shareholder-owned: source

• Reuters
• 08/23/2008 07:35 AM

Fed Chairman Urges Broader Market Oversight

• NY Times
• Uchitelle
• 08/23/2008 07:31 AM

Uncertainty Over Fannie and Freddie

• NY Times
• 08/23/2008 07:30 AM

GM, Ford Seek $50 Billion From U.S., Double Request

• Bloomberg
• 08/22/2008 03:41 PM

quotable
"Banks worldwide have $891 billion at risk in asset-backed commercial paper facilities because of credit agreements that ensure investors are paid back when the short-term debt matures, Fitch Ratings said."

Bloomberg, August 23, 2007

Gaming the Recession
Seeking Alpha - New York,NY,USA
During “The Great Depression” (1929 – 1939) 25% of American families had no income and 40% of factory workers were unemployed. In 1930 there were 200000 ...


Mortgaged future: US foreclosure leading to homelessness, disease ...
Bay Area Indymedia - San Francisco,CA,USA
We just don’t foresee the economic tsunami that many say is rolling our way faster than the government can print money or deny depression. ...

Economic recovery still a long way off, Bank of England chief warns
Telegraph.co.uk - United Kingdom
"Some people have said it's as big a financial shock as the Great Depression and as far as the oil shock goes the rise in oil prices is in the same order of ...


Consumer Stock Rally Doesn't Signal Economic Recovery (Update1)
Bloomberg - USA
The economy, buffeted by the biggest US housing slump since the Great Depression and more than $500 billion in bank losses, may grow 0.45 percent next ...


Deconstructing consumer confidence
Los Angeles Times - CA,USA
This dog learned to be helpless in its general approach to life, exhibiting symptoms similar to suffering chronic clinical depression. ...


Dueling Visions
Barron's - USA
WITH HOUSING IN A DEPRESSION, FINANCIAL COMPANIES in crisis, stocks slumping and a recession gathering or under way, you'd think that Wall Street would have ...

Slowdown echoes Great Depression, says Bank's deputy chief
Scotsman - United Kingdom
By Gerri Peev THE severity of the current economic downturn has been likened to the Great Depression of the 1930s by the new deputy governor of the Bank of ...
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Economic turmoil 'as bad as the 70s': banker
ABC Online - Australia
Charles Bean said the downturn was at least as bad as the 1970s oil shock and possibly as bad as the Great Depression. He said that every time the markets ...
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Here is the Barron's piece in a chart:



I prefer Obama's. Particularly on Estate Taxes. There are 17 families worth trillions of dollars who have spent a lot of money to make the Bush tax cuts permanent.

Fact: NOBODY want's to pay tax.

Fact: Dead people have no say in the matter.

Fact: Estate taxes are the easiest way to get money into the government, and 99% of all Americans don't pay them. And those 17 families can AFFORD to pay them.

My 2 cents.

The other side of the equation is INCOME. Unless America can generate some high-paying jobs, the tax question is moot. X percent of nothing is still nothing. And there is a limit to how many tax dollars you can clip off the hides of low-wage worker.

Not much.

The government needs to "go where the money is" and that is the so-called DEATH TAX.

All the other tax ideas have no cash base to draw upon.

2 more cents.

• Paul Krugman: Can It Happen Here? by Mark Thoma
• Paul Krugman: It’s the Economy Stupor by Mark Thoma
• Robert Pindyck on Energy Policy by Mark Thoma
• Paul Krugman: Now That’s Rich by Mark Thoma
• Obama's Tax Plan and Basic Honesty by Mark Thoma
• The Greek Menace by Mark Thoma
• Oil prices and demand by James Hamilton
• Iran buys wheat from American - is this significant? By Fabius Maximus

• Trade Policy and Moral Leadership by Mark Thoma
• Are Malthus's Predicted Food Shortages Coming True? by Mark Thoma
• Paul Krugman: The Great Illusion by Mark Thoma
• Distributional Effects of Environmental and Energy Policy: An Introduction by Mark Thoma
• The Selfish Hegemon Must Offer a New Deal on Trade by Mark Thoma
• The Dollar and the Trade Deficit: How Does Productivity Fit In? by Menzie Chinn

An Interview with Michael Hudson
How the Chicago Boys Wrecked the Economy

Mike Whitney: The United States current account deficit is roughly $700 billion. That is enough "borrowed" capital to pay the yearly $120 billion cost of the war in Iraq, the entire $450 billion Pentagon budget, and Bush's tax cuts for the rich. Why does the rest of the world keep financing America's militarism via the current account deficit or is it just the unavoidable consequence of currency deregulation, "dollar hegemony" and globalization?

Michael Hudson: As I explained in Super Imperialism, central banks in other countries buy dollars not because they think dollar assets are a "good buy," but because if they did NOT recycle their trade surpluses and U.S. buyout spending and military spending by buying U.S. Treasury, Fannie Mae and other bonds, their currencies would rise against the dollar. This would price their exporters out of dollarized world markets. So the United States can spend money and get a free ride.

The solution is (1) capital controls to block further dollar receipts, (2) floating tariffs against imports from dollarized economies, (3) buyouts of U.S. investments in dollar-recipient countries (so that Europe and Asia would